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What are the six types of money?

The various types of money are: Commodity Money. Fiat Money. Fiduciary Money. Commercial Bank Money. Metallic Money. Paper Money. Reserve Money.

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Rohina Ansari | Updated: Jul 16, 2021 18:04 IST

“Money & types of money” can be defined as the most commonly accepted form of exchange for goods and services. Money can be virtually anything as long as it is capable of satisfying the three conditions, that is, medium of exchange, store of value, and unit of account. In the following banking awareness study notes, we shall understand more about money and its related aspects. The standard money is a monetary unit which is declared by the government to serve as the base of its currency system. The word “currency” refers to the aggregate coins and paper notes (paper money). The term “paper money” sums the banknotes issued by the Central Bank, that is the Reserve Bank of India (RBI). Paper money is generally accepted in daily transactions as a mode of exchange for goods and/ or services.

Bill of exchange and cheques are also considered as paper money.

UPSC IAS aspirants preparing for economy are advised to read through the below sections to understand more about money. We shall see the types of money available in the finance world, along with a short note on the Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL).

Money & Types – Meaning & Overview

The word “currency” refers to the aggregate of coins and paper notes (paper money). The currency in broad view is the tangible medium of exchange. Almost 180 currencies exist around the world, as per the United Nations. However, the British pound is the oldest currency in the world, which is still in use, dating back to the 8th century.

The various types of money are:

Commodity Money

Fiat Money

Fiduciary Money

Metallic Money

Paper Money

Reserve Money

Money & Types (Terminologies)

Commodity Money

It is the easiest, most likely, and the oldest type of money. It builds on scarce natural resources that work as a source of exchange, storage value, and unit of account. Commodity money is closely related to (and originates from) a barter system, in which goods and services are directly interchanged for other goods and/ or services. Commodity money is a way of simplifying the process, as it acts as a commonly accepted medium of exchange. The significant thing about commodity money is that its value is described by the actual value of the commodity itself.

Few examples of money are gold coins, shells, spices, beads, etc.

Fiat Money

Fiat money is a type of paper money. It is the money which has a face value more than its real value. The actual value of money is worthless. It is accepted by the people on the order of the government. The face value is decided by the government and the money is not exchanged into standard money. The fiat money is used as a medium of exchange and as a standard of value. It may be paper money or any kind of commodity. The real value of fiat money is not equal to its face value.

This type of money is issued across the world.

Fiduciary Money

It is known for its value on the confidence that it will be commonly considered as a mode of exchange. In case asked by the bearer, the issuer of the fiduciary money guarantees to exchange it back for a commodity or fiat money. As long as the parties involved are confident that the assurance will not be broken, they may use the fiduciary money just like the regular fiat or commodity money.

Examples of fiduciary money are bank notes, drafts, cheques.

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It can be regarded as claims against the financial entities, which may be utilized to buy goods and/ or services.

The commercial bank money is created through so-called fractional reserve banking

Fractional reserve banking is when the commercial banks provide loans and/ or advances worth greater than the value of the real currency they possess.

Metallic Money

Pieces of metals like gold, silver, bronze, and copper came to be used as money in both ancient as well as current times. It can be classified as metallic money. The value of these in exchange of goods is equivalent to their actual/ intrinsic value.

Metallic money can be categorized into full bodied coins and token coins.

Paper Money

Paper money refers to the bank notes and government notes which are used as money. The distribution of the paper money started in order to replace the metallic money. In the modern days, paper notes inherited the characteristics of token money, being commonly acceptable without reference to that of the metallic equivalent.

Learn more about Regional Rural Bank, here.

Representative Money

All token coins and paper notes that can be readily converted into full-bodied coins or equivalent bullion (gold, silver, etc.) at a fixed rate, are known as representative money. Such a kind of money was accepted in India in 1927 when rupee notes and coins were easily able to convert into gold.

Unlimited Legal Tender

Money described by the central government to be legal tender to an unlimited extent is called unlimited legal tender. Under such a system, creditors are required to accept payments in this money to an unlimited extent.

The rupee notes and coins are unlimited legal tender in India.

Limited Legal Tender

In cases when coins and notes are legal tender only to a limited extent, they are known as limited legal tender. All the small coins in the country are legal tender to the extent of one rupee.

Know more about National Income, here.

Optional Money

All the instruments and notes like the bills of exchange, promissory notes, cheques, etc. are often accepted in the discharge of liabilities and obligations despite the fact they are not legal tender.

In collection, these instruments can be termed as “Optional Money”.

The acceptability of this kind of money is based on the mutual consent of all the parties involved in the transaction.

Bank Money

Bank deposits that can be withdrawn through cheques are generally known as bank money. Most of the banks create deposits when they extend loans to individuals or firms. These deposits are also known as bank money. All the banknotes issued by the banks contribute to another part of the bank money.

Credit Money

Most of the loans extended by the banks to the individuals and/ or businesses are usually held by them in the form of bank deposits. Such deposits can be withdrawn by using instruments like cheque, just like primary deposits made by depositors. It is called credit money.

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Money & Types in terms of Supply (M1, M2, and M3…)

M0 and M1, also referred to as narrow money, include coins and notes in circulation and other equivalent money that are easily convertible into liquid cash. M2 encapsulates M1 in addition to short-term time deposits in the banks and 24-hour money market funds.

Reserve Money (M0)

Circulating Currency + Bankers’ savings in the accounts of the RBI + Other deposits with the RBI = Net RBI loans given to the government + RBI credit to the commercial sector + RBI’s debits on banks + RBI’s net in foreign assets + government’s currency debts to the public – RBI’s net non-monetary liabilities

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M1:

Currency held by the public + Banking system’s demand deposits + Other deposits with the RBI

M2:

M2 is a wider classification of money as compared to M1, it includes assets that are highly liquid, excluding cash.

And M2: M1 + Savings banks’ deposits in savings accounts

M3

It is a quantity of the money supply in addition with M2 as well as institutional money market funds, large time deposits, short-term repurchase agreements, and other larger liquid assets.

M3:

M1 + Time deposits in the banking sector = net bank credit to the central/ state government + Bank credit to the commercial sector + net foreign holdings of the banking system + government’s currency debts to the public – net monetary debts of the banking sector

M4:

M3 + Entire deposits with post office savings banks (excluding National Savings Certificates)

Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)

The Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) was established by the Reserve Bank of India (RBI) as its wholly owned subsidiary in February 1995. As per the Companies Act 1956, it has been working as a private limited company. The BRBNMPL works to augment the production of banknotes in India to enable the RBI, one of the prime regulators of banks and financial institutions in the country, to bridge the gap between demand and supply of banknotes.

It is headquartered in Bengaluru, Karnataka

The BRBNMPL owns and runs 2 presses, one at Mysore, and the other one at Salboni The RBI has two more printing presses in Nasik (Maharashtra) and Dewas (Madhya Pradesh). Coins are minted in 4 mints completely owned by the government of India. These mints are situated at Bombay, Hyderabad, Calcutta, and Noida.

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Money & Types FAQs

Q.1 What is money? Ans.1 Money can be defined as the most commonly accepted form of exchange for goods and services. Q.2 Who issues currency notes and coins in India? Ans.2 The Reserve Bank of India reserves the right to issue currency notes and coins in India. Q.3 What are the types of money? Ans.3 Commodity money, fiat money, metallic, paper, reserve, fiduciary, fiat, and commercial bank money are the various types of money. Q.4 What is BRBNMPL? Ans.4 The BRBNMPL is Bharatiya Reserve Bank Note Mudran Private Ltd., responsible for augmenting the printing of currency notes and coins in India along with the RBI. Q.5 Where is the BRBNMPL headquartered? Ans.5 It is headquartered at Bengaluru, Karnataka.

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